Microsoft must 'change its illegal behavior'

EU antitrust ruling could affect other large companies

By TODD BISHOP, P-I REPORTER

Published
10:00 pm PDT, Monday, September 17, 2007

Microsoft Corp. was smacked down by Europe's second-highest court Monday and publicly scolded by a top antitrust regulator -- warned to stop using the dominance of Windows to its advantage in other areas of the software business.

The company vowed to comply with the ruling by the European Court of First Instance, even as it contemplates a further appeal. But Microsoft cautioned that the ruling gives European antitrust officials extraordinary power, creating a precedent that could sting more industry giants.

Neelie Kroes, the European competition commissioner, said the problem is what Microsoft has done with its market power.

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"Let me be clear, ladies and gentlemen, there is one company that will have to change its illegal behavior as a result of this ruling, and that is Microsoft," Kroes said at a news conference.

Kroes called the court's decision "bittersweet," saying that "the court has confirmed the commission's view that consumers are suffering at the hands of Microsoft." She called on Microsoft to "desist from engaging in its anti-competitive conduct."

In a news conference, Microsoft General Counsel Brad Smith cautioned that the court ruling could affect large companies of all types with strong market positions.

"I think that the decision very clearly gives the commission quite broad power and quite broad discretion," Smith said, citing other companies with large market shares in other parts of the technology market -- including Apple, Google and IBM. He said the ruling should get the attention of many people and companies in the industry.

The ruling upheld key elements of a March 2004 European Commission decision, finding that Microsoft misused its Windows monopoly. In an attempt to level the playing field for Microsoft's rivals, the commission ordered the company to offer a version of Windows in Europe without Windows Media Player and to license technical information about Windows to its competitors in the computer server market. It also imposed a fine of more than $600 million.

The court's decision did side with Microsoft on the commission's use of a trustee to monitor the company's activities, reversing elements of that portion of the commission's 2004 order.

The media player provision was aimed at one of Microsoft's most controversial practices -- the bundling of extra programs into the dominant operating system. Its similar incorporation of Internet Explorer into Windows was central to the U.S. antitrust case against the company, but it ultimately wasn't forced to remove the Web browser.

The bundling of Windows Media Player "enabled Microsoft to obtain an unparalleled advantage with respect to distribution of its product and to ensure the ubiquity of Windows Media Player on client PCs throughout the world," the European court wrote in a summary of its ruling.

The court's decision "sends a clear signal that superdominant companies cannot abuse their position to hurt consumers and dampen innovation by excluding competitors in related markets," Kroes said at her news conference.

Smith said the court ruling may require the company to change its approach to some aspects of Windows development.

"There may be times in the future when we'll add new features into Windows and need to address them in some different way because of today's decision," Smith said in an interview. But he added that it's "too early to draw that conclusion right now."

For Microsoft, the blow of Monday's ruling may be softened by the fact that it had already agreed to comply with the commission's decision, pending the outcome of the first appeal.

Microsoft paid the $600 million antitrust fine long ago. And the ruling doesn't require the company to stop selling the full version of Windows in Europe, just to offer an alternative version without the media player. Demand for that alternative version has been tepid, at best.

"As Microsoft is already selling a version of Windows in Europe that complies with the court ruling, we feel any perceived negative impact to the business is likely overstated and would be buyers of Microsoft stock on any weakness related to the decision," she wrote to clients.

However, the Monday ruling also leaves open the possibility of additional fines. Kroes already fined the company an additional $351 million in July 2006, saying that it hadn't adequately prepared the technical documentation for server rivals.

Since then, Kroes has threatened further fines -- potentially totaling more than $1.5 billion -- over the terms Microsoft has proposed for the licenses. In addition to reasonable pricing, Kroes wants the terms to be amenable to companies that distribute open-source software.

"The ruling confirms more than ever that Microsoft must comply with its remedy obligation, and I will not tolerate continued non-compliance," Kroes said during her news conference.

Steve Ballmer, Microsoft's chief executive, appeared to allude to the issue in an e-mail to employees after the ruling.

"There may be additional steps necessary to ensure that we are in full compliance with European law," Ballmer wrote. "We are in close contact with the European competition authorities and we will be discussing this with them in the days to come."

Smith echoed those comments in the interview but declined to give specifics about what Microsoft is prepared to do.

Seattle-based RealNetworks competes with Windows Media Player and previously settled its own antitrust suit against Microsoft over similar issues, for $761 million. Robert Kimball, the company's general counsel, said RealNetworks is happy with the ruling.

"I really do believe that having a clear set of rules that apply to how Microsoft bundles applications with Windows is going to be good in the long run," Kimball said. "I think that's going to be good for competition and good for innovation."

At the same time, he acknowledged that the company originally would have preferred a stronger remedy, such as separating Windows Media Player from all versions of the Microsoft operating system, not just from one version of Windows.